As the FT reported earlier this week, North Sea production is being hit critically by the economic crisis. The story quotes findings from a Deloitte report which says the number of exploration wells being drilled in the North Sea has collapsed by 78 per cent in the first quarter of 2009 versus the same period last year.
This is vitally important. As the FT highlights:
The worsening exploration climate could knock 10-15 years off the North Sea’s expected lifespan of 20-30 years, meaning almost half of all its infrastructure could be decommissioned within the next 11 years, UK Oil and Gas estimates.
In short, declining production from mature fields is not being compensated for because exploration and development of new smaller wells is not cost effective in the current price environment. All of which is accelerating non-Opec decline rates, which according to Goldman Sachs are needed before any renewed and sustained rally resumes in the crude market.
Significantly, the IEA in its latest oil market report published last week, also revised its oil supply forecast from non-Opec countries saying it expected production to fall by 320,000 barrels a day in 2009. The previous month it had left non-Opec output unchanged year-on-year.
Alongside the very serious (and much bigger than many expected) Opec cuts already enforced – all of the above could be pointing to a renewed supply/demand equilibrium in the market, facilitating the beginnings of the ultimate bull-market rally — the journey to the peak-oil supply squeeze.
However, even Goldman Sachs believes near-term fundamental support is not there yet. Non-Opec production is declining, but not to the degree needed to restore this sort of balance. The problem in the interim remains the large amount of inventory stock still in the system, and the continuation of the contango which needs to be broken before any significant rally can follow. As GS explained at the end of March (our emphasis):
The bottom line is that near-term fundamentals are not yet strong enough support a focus on longer-term supply constraints and a back-end-driven oil market. As we have long emphasized, long-term shortages create near-term surpluses. In the current environment it is near-term surpluses that are creating long-term shortages. And it will not be until the near-term surpluses are resolved that the market can comfortably refocus its attention on the long-term supply problems.
This is certainly consistent with the message out of Opec on Wednesday. In its latest oil market report Opec says that while it certainly expects a more significant decline in Non-Opec supply in 2009, and that declines are occurring – Opec cuts have clearly far outpaced non-Opec production. As the organisation writes:
Non-OPEC supply is expected to average 50.61 mb/d, representing an increase of 0.29 mb/d
over the previous year and a downward revision of around 80 tb/d from the last Monthly Oil
Market Report with each quarter showing a downward revision. On a quarterly basis, non-OPEC
supply is forecast to stand at 50.76 mb/d, 50.49 mb/d, 50.36 mb/d and 50.82 mb/d respectively.
Total OECD oil supply is projected to fall 130 tb/d in 2009 to average 19.47 mb/d, unchanged from the last assessment. The upward revision in Western Europe was offset by the downward revision in North America, while OECD Pacific supply remained unchanged compared to the previous MOMR assessment. On a quarterly basis, the first quarter experienced an upward revision of 226 tb/d, while the second quarter remained almost unchanged. The third and fourth quarters were revised down by 90 tb/d and 120 tb/d respectively. The upward revision in the first quarter 2009 was due to the adjustment made to actual data for January and February as well as to the estimation for March. On a quarterly basis, OECD oil supply is expected to average 19.85 mb/d, 19.42 mb/d, 19.18 mb/d and 19.42 mb/d respectively. Preliminary data for March put total OECD output at around 19.88 b/d, about 40 tb/d below the revised February figure.
And on the whole global supply picture they write:
Preliminary figures indicate that global oil supply fell 0.19 mb/d in March to average 83.39 mb/d. Non-OPEC supply experienced a slight decline of 0.04 mb/d, while total OPEC supply dropped by 0.17 mb/d. The share of OPEC crude oil production saw a minor decline to stand at 33.4% in March from 33.6% in the previous month. The estimate is based on preliminary data for non-OPEC supply, estimates for OPEC NGLs and OPEC crude production are based on secondary sources.
In short, non-Opec production is still not falling back quickly enough. The following chart from the report perhaps indicates just how much more non-Opec production has to be reined back to restore historical balance.
Of course, in many circumstances the reason why a lot of the production is still hanging on — specifically the case for mature fields like the North Sea — is because once it’s gone it may be gone forever. That’s because mature fields are not like Opec swing producing fields which can be easily turned up or down. Reduced output impacts pressure which can be very hard to restore.
Which means if non-Opec cuts do come in any accelerated pace, you can expect the ultimate supply-squeeze generated rally many are expecting further down the line will be all the more sharper.